Saturday, March 03, 2007

Q: What is the Best Way Retard a New Distribution Paradigm? A: Make it a Losing Proposition!

Ok, I love radio. In the last 25 years, though, my favorite medium has effectively been denuded through consolidation. The effect is that radio is as profitable as it has ever been, but it is completely boring. In many medium sized markets you may have 20 or so stations, three or four of which have any semblance of local programming. This, by the way, includes NPR. My local NPR AM juggernaut broadcasts 24 hours a day and I can count on one hand the number of substantial local programs that find any airtime.

What this means is that if you like local varieties you need to get on the net and stream. There's lots of college, public and commercial radio that streams as well as kick ass podcasts. But because of a struggle over how much digital radio and other digital deliverers should pay for play, we may have a real problem on our hands. The Copyright Royalty Board has held a number of proceedings on webcasting rates and terms , as Idolator notes
The board decided to go with the rate suggestions put forth by SoundExchange*, the division of the RIAA focused on collecting digital royalties, and not broadcasters; perhaps unsurprisingly, they're prohibitively expensive for even the largest broadcasters, and in some cases the required royalty payments may equal or exceed 100% of an Internet radio station's revenue.
Kurt Hansen explains
Because a typical Internet radio station plays about 16 songs an hour, that's a royalty obligation in 2006 of about 1.28 cents per listener-hour.

In 2006, a well-run Internet radio station might have been able to sell two radio spots an hour at a $3 net CPM (cost-per-thousand), which would add up to .6 cents per listener-hour.

Even adding in ancillary revenues from occasional video gateway ads, banner ads on the website, and so forth, total revenues per listener-hour would only be in the 1.0 to 1.2 cents per listener-hour range.

That math suggests that the royalty rate decision — for the performance alone, not even including composers' royalties! — is in the in the ballpark of 100% or more of total revenues.
Ok, so for every dollar I take in, you get a dollar. Hmmm? Profit anyone?

Ok, so if this is the case then this is completely unreasonable, which isn't to say it will somehow be dealt with in the future. Here's the reason why. This fight isn't about your small webcaster. Rather it is about how much XM or Sirius will pay to play. And the law being what it is, the consequences could be devastating to the little guy. If you want to see who was involved in this fight you can click here, here and here. I have only skimmed the surface here, but this is interesting to say the least. Basically what you have is "new means of distribution" meets "established organization with lots of clout", something we have seen seen before, When, you ask? Why, thanks for the question. Allow me to explain.. ahem...

Back in the old days of the US there was this old timey medium called broadcasting they wanted to use popular music on their airwaves. The big problem was that the most popular music was controlled by ASCAP, who had the rights to the best songs and wanted these broadcasters to pay through the nose to play them. ASCAP had the clout and the broadcasters did. Furthermore, ASCAP was notoriously picky about who got to join closed the door on many aspirant songwriters who they viewed as unskilled, unwashed and undesirable. The broadcasters looked at this option and decided to build a new organization that "opened the door" for these artists and the result was, you guessed it, BMI:
BMI was founded by radio executives to provide competition in the field of performing rights, to assure royalty payments to writers and publishers of music not represented by the existing performing right organization and to provide an alternative source of licensing for all music users.

BMI’s history coincides with one of the most vibrant, evolving and challenging periods in music history. As popular music has moved from big-band to rock & roll and hip-hop, and formats have evolved from 78 and 33 1/3-rpm vinyl records to compact discs, MP3s and beyond, BMI has worked on behalf of its members to maintain a leadership position not only in the United States, but worldwide.

Underlying everything BMI does is its philosophy: an open-door policy that welcomes songwriters, composers and music publishers of all disciplines, and helps them develop both the creative and business skills crucial to a career in music.
Ok, so this took about 17 years to happen, so don't expect new digital distribution organizations to get their act together anytime soon. And, yes, I do have suggestions on how to get their act together and with whom they should work with (and invest). Right now I would say that the terms Long Tail, EFF and Creative Commons could all be substantial keys. Let's just say that developing organizations that cultivate a new labor force and new contractual understandings will be key. Much in the same way that BMI was the key to getting hillbilly music on the air and those artists gaining some wealth as a result, I would hope that some people are out there beating similar bushes so that we still have an option to Clear Channel sanctioned radio and the artists who exists in those formats.

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1 comment:

Bennett Lincoff said...

Inhibiting the growth of webcasting was the goal from the outset, with passage of the anti-webcasting provisions of the DMCA. The impossibly burdensome music use reporting requirements and now these grossly unreasonable compulsory license fees are part and parcel of the over all effort to put an end to webcasting.

The problems lies with the music industry's addiction to its traditional sales-based revenue model and the negative policy implications of that has for consumers, technology firms, consumer electronics makers, and digital audio service providers of all types (not just webcasters). There can be no doubt but that public policy should support the opportunity of music industry rights holders to derive substantial revenue from their contributions to culture and to commerce. By the same token, however, the industry has no right to demand that public policy support its desire to do business in a particular way.

What's really needed is an alternative to the music industry's sales based revenue model.

I recently published a White Paper (available at in which I propose such an alternative. Mine is a comprehensive approach to rights licensing and rights management that does not depend on the efficacy of digital rights management (DRM) technology for its success. Specifically, I suggest that the rights of songwriters, music publishers, recording artists and record labels in their respective musical works and sound recordings should be aggregated so as to create a single right for digital transmissions of recorded music. The digital transmission right would be a new right, not an additional right. It would replace the parties’ existing reproduction, public performance and distribution rights (and, in those territories where it applies, the communication right).

Ownership of the digital transmission right in individual recordings would be held jointly by the songwriters, music publishers, recording artists and record labels who contribute to the recording. Each rights holder would have authority to grant non-exclusive licenses for digital transmissions of those recordings on any terms they and their licensees find to be mutually acceptable. The only limitation on this authority would be the obligation to account to co-owners pursuant to whatever arrangements they make among themselves for the division of royalties earned from this newly-established right.

The digital transmission right would be enforceable only against those directly involved in providing digital transmissions of recorded music. Accordingly, consumers would not incur any liability merely for surfing the web, accessing streaming media, or downloading music files. Neither would copying for personal use require authorization. Similarly, software developers, technology firms, consumer electronics makers, and telecommunications and Internet access providers, as such, would have no liability under the digital transmission right. On the other hand, service providers would need licenses if they operate web sites, social networking services, P2P file-sharing networks or the like that provide digital transmissions of recorded music.

Consumers would only need licenses if they act as service providers in their own right; that is, whenever they are responsible for the digital transmissions at issue. By way of example, consumers would need authorization if they operate music-enabled personal or hobby web sites; or if they upload music files to a web site or service that does not have its own licence under the digital transmission right authorizing this activity by users of its service (known as a “through-to-the-user licence”); or, if they offer recordings to others through participation in a P2P file-sharing network, or similar service, that does not have such a through-to-the-user licence.

The right would be implemented through a combination of free market transactions between individual right holders and service providers and voluntary collective rights administration. The best results for all would flow from a marketplace in which collective licensing is the norm and direct licensing the exception. The division of ownership of rights that I suggest will tend to encourage rights owners to work together through collective licensing organizations. I also suggest solutions to the complementary issues of how to license transborder transmissions and on what basis to distribute royalties each from those transmissions. In my view, overall success for the music industry will depend on the presence in each territory of at least one collective organization whose catalogue encompasses all or nearly all recordings and which is authorized to grant worldwide rights at its local rates for all digital transmissions of recorded music that originate from its territory.

Through the digital transmission right implemented as I suggest in the White Paper, digital transmissions of recorded music could be made available from the largest number and widest array of licensed sources, anytime, anywhere, to anyone with network access. Consumers would be free to enjoy music when, where and how they themselves decide. Technology firms and consumer electronics makers would be free to offer greater interoperability between the many recording, playback and communications devices that are available, and to meet consumer demand for new products with next generation capabilities. And, in the aggregate, music industry rights holders would do at least as well financially under my proposal as they do now under the system that my proposal would replace.